Trade ministers on the spot over export tax rules

East Africa’s policy makers face a tough task this week crafting a new trade policy to accommodate firms on export promotion schemes without hurting ordinary investors in the EAC region.

The export oriented firms - mostly foreigners lured into the region a few years ago to invest under schemes like export promotion zones (EPZs), duty drawbacks, duty or VAT remissions or manufacturing under bond - have been piling pressure on regional governments to review market access rules to allow more of their products into the regional market.

In what signifies a change of heart, Business Daily has learnt that uniform rules for investment promotions and a review of existing market entry rules for special scheme firms are high on the agenda of a week long meeting by ministers of trade, industry, finance and investment in the EAC.

The meeting opened in Arusha on Monday and is expected to make its decision public on Friday.

Under custom union protocol, only 20 per cent of total annual production of firms enjoying special schemes in member states such as those listed above can be sold in the domestic market.

Any quantity beyond this ceiling attracts import duty at the rates that EAC maintains with non member states that have no special trade arrangement with the region.

Previously, firms operating under special schemes could only sell 20 per cent of their produce within national markets, meaning there was no limit to sell in other EAC countries.

Firms on special schemes contend that the integration process which was revived long after they had set up their investments has cut off their links to the niche markets that they had come into the region to pursue.

Last week, Kenya’s EPZ authority’s Acting CEO Mr Joseph Kosure and his Tanzania’s counterpart Dr Adelhelm Meru upped the stakes with a joint statement requesting the EAC secretariat to revise the proportion of EPZ goods permitted into the custom territory upwards to 70 per cent.

The campaign to relax rules for export scheme firms is however facing strong opposition from ordinary investors in the region who maintain price differentials that will result could distort the custom union market, with far reaching adverse economic effects.

“Goods manufactured within EPZs (or other export promotion schemes) of any member country do not qualify for community’s preferential tariff treatment but are considered as imports from outside the union,” argues Mr Adrian Njau, a trade economist at the East African Business Council

This year, Kenya, Tanzania, Uganda Rwanda and Burundi completed the five-year process of merging their markets into a single domestic market (custom union), completely sealing off some of the export destinations for companies that relied on sales to individual EAC member states which operated as separate custom areas up to the end of last year.

Last week, the EAC secretariat maintained that any foreign investors coming into the region under export promotion scheme must learn to view the five countries in the region as the ‘domestic market’ seek export destinations elsewhere.

In Kenya, EPZ companies enjoy 10 year corporate income tax holiday and a 25 per cent tax rate for a further 10 years thereafter.

They also enjoy perpetual exemption from stamp duty and 100 per cent investment deduction on buildings and machinery.

Last week, Kenya’s EPZA officials cited examples of firms such as I VEE Aqua ltd — a sterile preparations manufacturer which had set up base in Athi River — which take advantage of the country’s strategic location, to be able to deliver products to the regional markets at affordable prices.

Sterile preparation

A sterile preparation is said to be one of the most expensive undertakings among pharmaceutical firms, a factor that prompted the company to set a local factory in the hope of cutting logistics costs involved in exporting from Europe in order to sell in a market where average incomes still fall below two dollars a day.

“We are now in a situation where goods manufactured locally are made to access the custom union at more expensive prices compared to goods from far off countries of the Comesa region,” said Kenya’s EPZ Authority’s (EPZA) spokesperson Jonathan Chifalu.